Unilever Squeezes Ad Production by $700 Million, But Speeds Sales

Unilever squeezed around $700 million out of production costs last year by making fewer ads and doing more work in-house, according to numbers cited by executives in today's fourth-quarter earnings report.

Those savings accounted for most of the improvement in the operating margin for the world's second-biggest marketing spender last year. Unilever put less than half the production savings back into media and in-store marketing, while taking most to the bottom line. Couched as "production," the squeeze largely affected work done or overseen by agencies.

Among other key takeaways:

Unilever beat analyst forecasts on the top line. Organic sales growth of 4 percent for the fourth quarter (excluding impact of currency and divestitures) came mainly from unit volume, not pricing, reversing a recent string of volume disappointments and relieving pressure for Unilever to spend more on marketing. During a December investor conference, CEO Paul Polman railed against analyst contentions that Unilever's sales had been hurt by restrained marketing spending. This quarter's results appear to give him some support.

Unilever spent around $300 million of its production savings for the year on media and in-store outlays. That pushed overall media spending up slightly for the full year on a local-currency basis. While the precise number wasn't reported today, Unilever's all-in reported marketing spending should be around $9 billion for 2017.

Unilever was a ray of sunshine in a generally gloomy household and personal-care space. Its results came in ahead of U.S.-based peers such as Procter & Gamble Co., Kimberly-Clark Corp., Colgate-Palmolive Co. and Johnson & Johnson. But it could be a short-lived edge, given that a stronger euro, weaker dollar and new tax law could assist U.S.-based players this year.

E-commerce looms larger all the time. Polman spoke on analyst and media calls about the growing importance of digital media, in part as a driver of e-commerce. Unilever's online sales "nearly doubled" last year to around $2.5 billion, says Chief Financial Officer Graeme Pitkethly. That means essentially all of Unilever's sales growth last year came from e-commerce—be it players such as Amazon, Alibaba and Walmart or its own subscription businesses, led by Dollar Shave Club, which just launched an expansion into the U.K. last month.

The 3G wolf is further from the door. Only a year ago, Unilever was target of an unwanted takeover bid from private-equity firm 3G Capital and its Kraft Heinz business. That spurred intensified cost-cutting and growth plans, which today's results suggest are helping, plus a soon-to-be-complete divestiture of Unilever's margarine and spreads business. Today's results help relieve pressure for deeper cuts or a bigger breakup.

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Jack Neff

Jack Neff, editor at large, covers household and personal-care marketers, Walmart and market research. He's based near Cincinnati and has previously written for the Atlanta Journal Constitution, Bloomberg, and trade publications covering the food, woodworking and graphic design industries and worked in corporate communications for the E.W. Scripps Co.